The behaviour of stochastic volatility in energy futures contracts with the COVID-19 and the Russia-Ukraine conflict
Event Title
Research Seminars Series - School of Business and Economics, University of the Azores.
Year (definitive publication)
2023
Language
English
Country
Portugal
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Abstract
This paper studies the volatility dynamics of futures contracts on crude oil, natural gas
and gasoline. An appropriate Bayesian model comparison exercise between seven stochastic
volatility models is estimated using daily prices for our futures contracts between 2019 and
2022 to examine the COVID-19 and Russia-Ukraine conflict effects. Alternative Bayesian
information criteria are also tested. Overall, we find that: (i) the Bayes factor shows that the
stochastic volatility model with t-distributed innovations outperforms the competing models
for crude oil and gasoline, while incorporating jumps seems more appropriate to model
natural gas contracts and to accommodate the impacts of the Russia-Ukraine conflict; (ii)
contracts with different expiry dates may require alternative stochastic volatility behaviours
and (iii) other Bayesian criteria more appropriate to short-term predictive ability—such as
the conditional and the observed-date deviance information criterion—suggest other rank
order to model our futures contracts, despite some agreements in the best models.
Acknowledgements
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